Banks need incentive to take grain instead of gold

Two domestic banks have agreed to offer loans backed by commodities, allowing farmers to pledge items like beans and pulses as collateral for access to competitively priced financing for the first time.
However, the appeal of warehouse receipt financing may be limited, as capped interest rates mean the lenders have little incentive to take on the risk.

Yoma Bank and CB Bank have both teamed up with the Myanmar subsidiary of Indian warehouse services firm Sohan Lal Commodity Management, SLCM Limited, to offer commodity-backed credit. This is the first time the service has been made available through official channels in Myanmar.

Despite recent reforms to the banking sector, financial inclusion in Myanmar remains very low. Less than one third of the country has effective access to credit, savings, payment and insurance products from formal institutions, according to the Myanmar Financial Inclusion Roadmap 2014-2020 published by the United Nations Development Programme.

A major problem is that banks cannot offer loans that are not backed by assets. Until now, the only assets accepted by formal financial institutions have been property, gold and gems. This particularly affects rural farmers, who are often without land or title to use as collateral.

SLCM Group CEO Sandeep Sabharwal claims the new financing scheme – which allows commodities traders and others to obtain loans against the value of their goods – has the power to “invert the pyramid”.

In Hlaing Tharyar Industrial Zone, down a road littered with potholes large enough to cause a taxi driver to swerve, is one of four Yangon warehouses run by SLCM. Inside, Myanmar country head Anubhav Sengar walks the wide avenues bordered by barrels of palm oil, granite tiles stacked high, and other sacks and containers of commodities including bitumen, beans and cookies.

The company vouches for the quality of the commodities, said Mr Sengar. Then, in theory, companies or farmers can take out a loan of up to 60 percent of their value, from Yoma or CB Bank.

In the formal banking sector, interest rates are capped at 13pc per year, or 1.08pc a month. This is vastly lower than rates set by informal moneylenders, at around 2pc to 3pc per month, according to Mr Sengar.

With cheaper access to financing, more farmers will be able to afford to store their crops in warehouses and then sell them out of season for a higher price, he said. At the moment, many have to sell their produce as soon as it is harvested, when supply is plentiful and prices are low.

However, in reality the service is likely to cater to higher-end clients such as traders, according to Yoma Bank’s CEO Hal Bosher. Since signing with SLCM, the bank has only issued one commodity backed loan, of K680 million (US$625,500), which is backed by milk powder, Mr Bosher said.

A major problem with the scheme is that banks are not incentivised to take on the risk of commodity-backed loans, due to the national interest rate cap of 13pc.

“The risks are significant because you need to be able to evaluate the crop you’re taking as collateral, discount it appropriately and store it over the right amount of time,” said Mr Bosher.

“[Banks] can’t price to risk because the rates are fixed. So the incentives into higher-margin products are limited,” Mr Bosher said. “If I can do straight loans backed by land and property, what’s the incentive? I’m taking more risk for no more income.”

Furthermore, the scale of SLCM’s warehouses means it is unlikely that Yoma Bank will extend many loans for the time being, he added.

“As a bank, for somebody to come in with $5000 worth of pulses, it’s not going to work. You need to have scale [and sophistication],” he said. “Maybe one day it will happen at that level, [farmers will] come together as a group and put everything into a warehouse, but you need a lot of mobilisation.”

SLCM has already started talking to microfinance institutions and non-government organisations about rallying farmers towards collective action, according to Mr Sengar.

“We are working on a small project with a few agencies to get a group of farmers who can store goods and take out loans in a cooperative way,” he said.

Meanwhile, SLCM has been discussing the potential for expansion with prospective partners including Myanmar Agriculture Public Corporation (MAPCO), according to Mr Sengar, as well as educating Myanmar customers about its services.

In India, the company says it has helped bring post-harvest waste down from more than 10pc to 1pc or less. The aim is to do the same in Myanmar, where the rate of waste is twice as high, said Mr Sengar. There is no official data, but the figure is likely to be around 22pc, he said.

While the company’s operations and partnerships with Myanmar banks could help broaden collateral options for those taking out loans, roadblocks such as the interest rate cap mean that waste reduction is likely to be SLCM’s main business for the time being.

“We are going to Mandalay. We are already talking to traders and agents there. We want to scale it up, to a higher level and deep into Myanmar,” said Mr Sengar.

Source: Myanmar Times

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